Ensuring sufficient supply of healthcare products in an age of extreme weather
Drug companies have many tactics as their disposal to minimize supply chain disruptions for critical healthcare products, but should they shoulder all of the costs of doing so?
Climate change for biopharmaceutical companies in general, and Baxter specifically, are of concern for 3 main reasons within supply chain management[1]
- Damage to manufacturing plants: Baxter has manufacturing plants situated near coastal areas, which could be susceptible to severe weather shocks. For example, they have 3 manufacturing facilities in Puerto Rico, which has experienced a record number of hurricanes recently. For example, Hurricane Maria earlier this year disrupted the country’s power grids, disabling the plants and causing a severe shortage of saline solutions, for which Baxter is the market leader in. This has resulted in many hospitals scrambling to get enough saline, including having to choose alternative saline providers.[2]
- Damage to inventory stockpiles of raw materials and/or finished goods: Similar to the comment above, severe weather can damage either sources of raw materials or finished goods, which will cause random hits to total supply of a product
- Sharp increase in demand of drugs due to natural disaster and/or long-term environmental changes: Lastly, natural disasters can lead to a spike in demand for various drugs, including drugs that dose through IV, all of which require saline for injection.
Baxter’s management team has a multi-pronged approach to addressing climate change and supply chain.
- Short term
- Rationing sales: Immediately after the supply shocks, they can ration the product based on historical demand from hospitals. However, while this leads to all hospitals getting some of the product (e.g., saline solution), it still isn’t enough to fully address the hospitals needs[3]
- Regulatory support: The FDA temporarily granted a license for Baxter to supply US-based hospitals through their other manufacturing facilities located in Ireland and Australia.3
- Schedule emergency shipments of finished goods prior to predictable natural disasters: Baxter shipped out all of its finished goods before the hurricanes hit[3]
- Medium term
- Broaden manufacturing: They have been somewhat hesitant to fully buy into actively managing supply chain risk due to severe weather, such as AHA’s push for the FDA to emphasize finding suppliers within the US that aren’t as susceptible to natural disasters[4]
- Work more closely with newly created hurricane task force from FDA. The FDA also helps with logistics, including arranging for power generators to be moved to locations of interest. Baxter can more fully cooperate with the FDA and other players in the industry to develop these types of contingency plans
- Long term
- Sustainability: Baxter is working with all regulatory agencies to meet and exceed regulations on climate change for their business operations (green buildings, limiting emissions, etc.)
There are 3 other steps that they can take a look at in order to address these risks
- Get full FDA approval for their entire supply chain, or at least a portion of it. This would mean that the FDA would allow them to permanently import saline from manufacturing plants outside of Puerto Rico (e.g., Australia and Ireland). Currently, the vast majority (if not all) of their saline that is approved for sale in the US come from only Puerto Rico. They can further de-risk by spreading this to more than just the US. For example, getting EMA approval from multiple manufacturing facilities to ship saline solution into Europe.
- The same argument above also applies to their sources of raw materials, which is also fairly concentrated.
- They can also proactively reach out to legislators to work on getting incentives to minimize supply chain disruptions due to weather-related events, as healthcare counts as a public good. This would enable government (or other players such as insurers) to take on some of the costs involved in de-risking the supply chain and ensuring that patients have access to quality healthcare, since they also benefit from healthier patients
Some outstanding questions may include
- De-risking the supply chain may require significant upfront costs, as they increase inventory or seek additional regulatory approval and/or renovate manufacturing and storage facilities. If the costs outweigh the benefits to Baxter, to what extent should they go ahead and implement these solutions, and who else should bear the burden of some of these costs?
- Is there a way to engage other stakeholders (e.g., insurance companies, providers, and even other biopharma/med tech companies) to tackle the risks involved with climate change on healthcare supply chain?
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1) Ventola, C. Lee. “The Drug Shortage Crisis in the United States: Causes, Impact, and Management Strategies.” Pharmacy and Therapeutics 36.11 (2011): 740–757. Print.
2) Loftus, Peter, and Jonathan D. Rockoff. “Baxter Says Saline Shipments Disrupted in Hurricane-Wracked Puerto Rico.” The Wall Street Journal, Dow Jones & Company, 27 Sept. 2017, www.wsj.com/articles/baxter-says-saline-shipments-disrupted-in-hurricane-wracked-puerto-rico-1506545326.
3) McGinley, Laurie. “Hospitals Scramble to Avert Saline Shortage in Wake of Puerto Rico Disaster.” The Washington Post, WP Company, 11 Oct. 2017, www.washingtonpost.com/news/to-your-health/wp/2017/10/09/hospitals-scramble-to-avert-saline-shortage-in-wake-of-puerto-rico-disaster/?utm_term=.a56608109c87.
4) Ramsey, Lydia. “We’re Running out of Commonly Used Drugs – and Hospitals Say It’s ‘Quickly Becoming a Crisis’.” Business Insider, Business Insider, 10 Nov. 2017, www.businessinsider.com/drug-shortages-are-getting-worse-american-hospital-association-2017-11.
Super interesting post! Thanks for sharing!
I had read about the supply shortages in the U.S. due to the demanage of the Puerto Rico plant. It’s a serious public health concern and one that I think merits both public and private sector attention. I think this absolutely points to the need to diversify the supply chain. Especially in an era of global warming when we can expect more catastrophic events, we must have more resilient supply chains that can withstand such shocks. The long term investments to make these changes are expensive especially when potential damage is unpredictable. I think if customers, like hospitals, had stronger contracts and more leverage on suppliers, they would demand terms that posed astronomical costs on suppliers like Baxter who are not able to meet their order demands in time (think Fuyao). If this was the case, Baxter would face a different calculus in how it thinks about supply chains costs and it might actually be more attractive to build a more distributed supply chain closer to the end consumer to limit the risk of late-delivery related costs. I think insurance plans could play a role in this if they partnered more with hospitals to pressure suppliers into contracts that created these types of incentives. Insurance providers who are responsible for the total cost of patient care, also have an incentive to reduce supply restrictions as such restrictions would lead to more catastrophic health events and deterioration of patients to a situation in which they need even more expensive care. Not sure if this would work but just an idea!
Would love to get your thoughts and discuss further. Thanks for sharing this!
Jon — very interesting and important post.
I agree with Katherine’s comment, and I would like to add that the strategies taken to de-risk the supply chain could be vary greatly for different types of medical supplies / drugs. One key distinction is between patented drugs, and drugs that are produced by multiple corporations (e.g. generics). For example, Katherine’s suggestion to build out a more distributed supply chain might not be necessary when the drugs being supplied by Baxter are generic (e.g. saline solution). Baxter can work with hospitals and other suppliers to set up contingency plans for these other suppliers to cover a portion of Baxter’s contract if Baxter’s supply chain is disrupted. Baxter can take a small cut for arranging this partnership in advance and designating a preferred “alternate supplier”. Instead of the hospitals scrambling when Baxter cannot fulfill their contract, the hospitals can turn to these designated alternates, which ostensibly are prepared to fill this gap.
Jon – very interesting and timely topic!
I think the up front and ongoing costs of maintaining a de-risked, global supply chain are large and only practical for the purpose of addressing supply / demand shocks (like Hurricane Maria). In steady state, it would likely never make economic sense for Baxter to ship saline from Europe or Australia to the US. I think insurance companies and governments can play a roll in incentivizing healthcare products companies to developed these globally approved supply chains, as they can be critical to administering adequate life saving care in an efficient manner. In the long run, I also think manufacturers need to be proactive in developing facilities in locations at lower risk of harm from natural disaster. Again, I think governments can provide incentives for this type of expansion to take place. There is a risk, however, in relocating jobs away from natural disaster zones and leaving those regions with fewer resources to combat the aftermath of such disasters
Thanks for sharing this Jon.
To your question on engaging other stakeholders, I think there might be ways for insurance providers to help with preventing / managing Baxter’s supply chain disruption from an operations perspective.
Insurance providers will stand to gain tremendously if Baxter is able to manage these disruptions better. For example, I would assume that Baxter had taken out a protection policy against natural disasters in Puerto Rico. If Hurricane Maria was a qualifying event, then Baxter should have received some form of a pay out from their general insurer. Separately, health insurers who cover the cost of patient care would also have been affected at the tail-end of the supply chain as the duration of patient care would likely have increased during this period.
For general insurers, weather tracking and climate change are key risks to be managed as this affects the premiums that are charged on policies that provide coverage on catastrophic damages / weather-related events. Baxter may be able to form a close alliance with an insurance provider who can provide advice on how to pre-emptively manage around natural disasters based on the data that the insurer gathers. Similarly, health insurers that are affiliated with certain hospital systems may be able to help Baxter with obtaining buy-in for pre-emptive measures that increase supply of healthcare products within these systems prior to a potential weather event.
Both these measures however depend on high quality predictive data that provides sufficient time to react – I’m not sure how feasible this will be given the nature of catastrophic weather events.
Very interesting post Jon! As someone with a tangential interest in disaster medicine, the access of medications during natural (and other) disasters is a fascinating and very complicated topic.
I think that Anusha is absolutely right – in order for this to work well, highly accurate predictive measures should be in place. This idea of proactively diversifying one’s supply chain when it comes to the generic, basic necessities for disasters (saline, gauze, certain antibiotics, and perhaps even blood or synthetic blood products in the future) is highly valuable when disaster strikes. The problems arise when costs outweigh benefits, as it is incredibly difficult to convince stakeholders to invest in such diversification, especially if events are unpredictable.
One such stakeholder is the U.S. government, specifically FEMA (Federal Emergency Management Agency). FEMA is famous for being reactive, even when situations are at their worst (see Hurricane Katrina). To convince a stakeholder like FEMA to invest in diversifying a medical supply company’s supply chain prior to a natural disaster would be incredibly difficult. These agencies often operate on a shoestring budget and instead usually end up spend far too much money acting reactively rather than proactively.
Instead, Baxter could try to convince health insurance companies, as others have mentioned, to engage in a risk-sharing model. By offering to split costs based on either risk-sharing (if no disaster occurs and we lose out on our supply chain, we both lose) or profit sharing (if a disaster does occur and we save money because we diversified, we both win), insurance companies may be happy to help companies such as Baxter prepare for natural disasters.
Of course, the “scheming CFO” in me also sees the opportunity for price gouging in a time of dire need. By diversifying one’s supply chain, regardless of cost, Baxter could become the sole provider of necessary medical supplies. Prices in medicine are constantly negotiated and re-negotiated, and people are willing to spend anything to keep themselves alive. While I hope no company would take this stance during a disaster, I can’t help but worry that someone might.
Great read, Jon, thank you!
I like that you focus on derisking the supply chain in an age of volatile climate change. As well as diversifying sources of raw materials and production facilities in order to protect against natural disasters.
However, I am wondering now about the broader implications of the ‘sprawl’ of industrial facilities. It would seem that true diversification in the supply chain would lead automatically to having many more factories located in disparate areas would lead to wider impact in terms of environmental pollution. Not sure how this element could be controlled, but would have to imagine that water, air, and soil pollution being negatively effected in perhaps three or four times as many regions would ultimately be akin to placing a very poor and temporary ‘band-aid’ on the situation, in fact contributing more and more to the problems that create such natural disasters.
Thanks Jon for an interesting analysis. I fully believe that Baxter should find opportunities to spread these costs out among other players in the supply chain. Ultimately, Baxter will not be the only company in its competitive set that will face these challenges in their manufacturing and sourcing operations. However, their approach to responding to them will change their competitive positioning. If Baxter shoulders the full costs of these changing conditions, it will mitigate its cost-competitiveness and erode its positioning over time.
Instead, Baxter should demonstrate to other players in the supply chain the way in which these changing conditions will diminish their ability to operate effectively. They should work with downstream players to identify collective solutions. These may involve adjusting supply routing or fundamental delivery operations. Based on the locations of downstream partners, their analysis may inform shifting geographic locations to mitigate the impacts of climate change across their existing footprint. In any alternative, it is critical that Baxter find ways to respond to these threats in coordination with supply chain partners as opposed to shouldering the cost burden alone.